Can Samsung Ever Dethrone Apple, Inc.? Can Anyone?

While Apple stock is enjoying record quarterly sales, Samsung's premium smartphone line is facing challenges.

Apple(NASDAQ:AAPL) has repeatedly proven that it can dominate the high-end of almost any market it enters. It did this with PCs (and still does), MP3 players, smartphones, and tablets. But the fast-growing user base of Samsung's flagship Galaxy smartphone line seemed to challenge the notion that this top spot could belong to the Cupertino-based tech giant for the long haul. Lately, however, Samsung is showing signs that it could slip from grace.

Galaxy S5. Image source: Samsung.

The battle for profits Notably -- and contrary to some reports -- Samsung hasn't ever caught up with Apple in the smartphone battle. This is clear by looking at the key metric every business is ultimately vying to boost: profits. Samsung's mobile operating profits are weak in comparison to Apple.

In the first calendar quarter of 2014, for instance, Samsung sold an estimated 89 million smartphones and only reported $6.4 billion in mobile operating profits, according to data from Strategy Analytics. Apple sold a much smaller 43.7 million iPhones during the quarter while recording $7.7 billion in conservatively estimated iPhone operating profits (estimate based on applying the iPhones share of total Apple revenue -- 57% -- to Apple's total operating profits). Samsung's profitability per smartphone sold is irrefutably much lower than Apple's.

And this specific quarter's data makes the race look closer than it really is. In the fourth calendar quarter of 2013, the first full quarter of availability of the iPhone 5s, the iPhone accounted for an estimated 87% of global mobile operating profits according to Raymond James analyst Tavis McCourt. Samsung came in at 32%, he says. And if you were wondering about how these figures add up to a number greater than 100%, that's because many mobile phone manufacturers lost money during the quarter.

Even more, Samsung's mobile phone operating profits are now on the decline.

Tough times for SamsungTaking a look at some recent trends for Samsung's smartphone business, it appears the segment is no longer looking up.

Consider that Samsung's mobile operating profits were actually down slightly, year over year, in the first quarter of 2014, even though its smartphone shipments were up about 20 million. In the same period, Apple's operating profits grew 8.24%, year over year.

iPhone 5s. Image source: Apple.

The decline in profits comes from a challenged Galaxy smartphone line. Even Samsung is warning that it is losing in the premium smartphone market. The company has repeatedly explained to investors that sales growth is coming from mass-market devices like the Galaxy Y and that its premium phone market seems to have peaked, with flat year-over-year sales growth.

Samsung could see this coming as early as January 2013 when it stated, "the furious growth spurt seen in the global smartphone market last year is expected to be pacified by intensifying price competition, compounded by a slew of new products."

Further, Morgan Stanley analyst Katy Huberty's surprisingly accurate AlphaWise survey suggests that demand for the premium-priced Galaxy line of smartphones is actually slumping, with sales declining 1% in the second calendar quarter of 2014 from the year-ago quarter. The same survey projects Apple to report sales of 39 million iPhones, up 25% from the year-ago quarter.

While Samsung does not report smartphone sales figures, a just-released report from Samsung cited declined smartphone shipments for a large hit to profits. Its operating profits for the quarter were down 24% from the year-ago quarter, a worse decline than analysts expected.

Meanwhile, analysts have big expectations for Apple's iPhone 6 line, rumored to launch in two larger sizes later this fall. Samsung's challenges are a reminder of just how difficult it is to compete with Apple's robust ecosystem of integrated hardware, software, and services that keep customers coming back for more, and willing to pay up a premium dollar.